Latin America

Economic Snapshot for Latin America

August 12, 2014

Latin America remains trapped in a period of marked economic deceleration due to two main factors: Weaker global demand is impacting some countries’ external sectors, particularly those countries in which the external sector is dependent upon the export of commodities. Soft growth in investment in other countries is also contributing to the region’s deceleration. Analysts polled by LatinFocus lowered Latin America's GDP growth forecasts again in August. Participants now see the region's GDP expanding 1.6% in 2014, which is down 0.2 percentage points from last month's estimate. This is the 16th consecutive month in which panelists have lowered the region's economic outlook and, if the result is in line with the forecast, this will represent the slowest pace of expansion since 2009. August's downward revision was the result of lower growth prospects for 7 of the 11 economies surveyed, including Latin America's powerhouses Brazil and Mexico, while panelists left the growth estimates unchanged for the other 4 economies surveyed. Economists are also less optimistic about the prospects for 2015 and reduced the regional GDP growth forecast from the 2.8% expected last month to 2.7%.
 
The global economic recovery is still weak and geopolitical tremors continue to add uncertainty to the economic environment. Panelists polled by FocusEconomics downgraded the outlook for the global economy for the third consecutive month in August, lowering it by 0.1 percentage points over the previous month. Analysts now see the global economy growing 2.8% in 2014. The downgrade was driven by cuts to the outlook for the United States and the BRIC economies. Moreover, political tensions involving Russia, Ukraine and the West continued to cloud the global outlook as western economies hardened their position against Russia after pro-Russian separatists in the eastern regions of Ukraine allegedly shot down a commercial airliner in mid-July. Consequently, leaders in the European Union announced a new round of sanctions against Russia, which are expected to exert additional pressure on the Russian economy. Although the Russian government had previously pledged not to engage in tit-for-tat measures, it responded to western sanctions by announcing a year-long ban on the import of a wide range of agricultural and food products from the United States and the European Union, as well as Australia, Canada and Norway. In addition, Russian authorities threatened possible sanctions on the aerospace, shipbuilding and automotive sectors. Most analysts warn that the mutual economic sanctions are likely to exacerbate the already difficult economic situation in Russia and also in the European Union.

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Economic growth among countries in Latin America is still uneven, with robust growth projected for some countries while two economies are expected to contract. On one hand, growth in the economies that make up the Pacific Alliance is expected to be above the regional average this year. In fact, Colombia and Peru will grow at a rate of 4.9% and 4.5%, respectively, which is more than twice the regional average, whereas GDP growth in Chile and Mexico is projected to come in at 2.7% and 2.5%, respectively. On the other hand, the Mercosur bloc is expected to see growth well below the regional average in 2014, which stems from deteriorating GDP growth prospects for Argentina and Venezuela. These economies are seen falling 0.9% and 1.9%, respectively. Meanwhile, Brazil's economy is expected to expand a meager 1.0% this year, whereas Paraguay and Uruguay are expected to perform better than their Mercosur peers (4.8% and 3.0%, respectively).
  
In Chile and Mexico, structural reforms took center stage this month. Following months of debate in Chile between the ruling center-left Nueva Mayoria coalition and the center-right Alianza opposition, the Senate approved a controversial tax law. The approval of the reform marks a milestone for President Michelle Bachelet’s administration, which expects to generate nearly USD 8.2 billion per year in tax revenues (see details on page 52). In addition, the political accord provides the government more room to push forward some of its other reforms, including in the education system. Meanwhile, the Mexican congress passed the energy reform by-laws; most notable are the changes to the hydrocarbons law—the centerpiece of the energy reform. The reform of the hydrocarbons law effectively brings an end to state-owned Pemex’s more than 70-year monopolistic position in the oil sector (see details on page 81).

Argentina's debt saga continued over the past month. Although U.S. Supreme Court judge Thomas Griesa encouraged the Argentinian government and its holdout investors to continue talks, on 30 July, Argentina was unable to reach a deal with creditors who rejected participation in the 2005 and 2010 debt swaps and thus the country defaulted on its debt for the second time in 13 years. The default puts Argentina's objective of returning to global capital markets at risk and it is likely to weigh on the country's already tepid economic growth (see details on page 21). Against this backdrop, the black-market Argentinian peso weakened substantially in July, whereas the official peso retreated only slightly. Argentina's suspension of payments, however, did not have a significant impact at a regional level, which was mainly due to limited financial links and the unique nature of the event. Moreover, the continued appetite for risk and the on-going abundance of global liquidity favored renewed capital inflows in the region.
 
Inflation expectations for Latin America rose again in August, mainly reflecting higher inflation in Venezuela. LatinFocus panelists raised their inflation forecasts for 2014 by 0.1 percentage points and now expect the regional average to close 2014 at 12.1%. Analysts also raised their inflation projections for 2015 from July's 9.7% to 10.2%.

Faltering economic growth has tended to skew monetary policy in the region towards a more accommodative stance this year, even in economies where high inflation levels are casting doubt on whether central banks have more room for further monetary stimulus. The central banks of Brazil and Peru left interest rates unchanged at 11.0% and 3.75%, respectively, but both banks also reduced reserve requirements in order to foster credit and support economic growth. Meanwhile, the Chilean Central Bank cut the policy rate from 4.00% to 3.75% in order to buttress faltering economic growth. That said, the Colombian Central Bank decided to hike its reference interest rate from 4.00% to 4.25% in order to contain inflation expectations.

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